Perennial China Retail Trust:
Price Target : 12-Month S$ 0.84
Sequential improvement in Shenyang
•Distribution income supported by earn out
•Operations stabilising and growing on track but pre-opening expenses may dampen performance
•Maintain BUY, TP S$0.84
Supported by earn out. PCRT reported Q4 distribution income of S$10.9m, which largely came from earn out deed support of S$10.9m. This translates into a DPU of 0.95Scts. Total 2H13 DPU of 1.9Scts will be paid out on 11 Mar. At topline, although it chalked revenue of S$1.3m, pre-operating expenses of S$4.15m from its Foshan and Chengdu malls eroded profits. The group took in net revaluation surplus of S$53m, bringing its book NAV to S$0.77/unit.
Sequential operational improvement.More importantly, we note that assoc contributions have improved q-o-q from S$1.8m in Q3 to S$2.2m, indicating some stabilisation coming into its Shenyang assets. RSM Furniture Mall is 93% leased, SL Office is 46% (vs 41% in Q3) committed, while SL Shopping Mall is 88% (vs 85% in Q3) taken up. The latter’s improved showing was achieved on higher shopper traffic of c.4.7m from Oct-Dec 13. With improved shopper footfalls and higher tenant sales, we anticipate that the trust can achieve good take and positive rental reversion of 8-15% for 39% of NLA due to be renewed at the shopping mall. Perennial Jihua Foshan is presently 95% occupied, while Perennial Qingyang Chengdu is 85% pre-leased.
Operational ramp up, partly offset by opening expenses. Going into FY14, we expect the trust to enjoy a full-year’s contribution from Foshan and maiden contributions from Qingyang, as well as improved operational performance from Shenyang. It targets to hit a 95% take-up rate for SL Shopping Mall. While the office leasing market in Shenyang is fairly quiet, negotiations on hand currently, if concluded, can bring its take-up to 50%. However, we are also cognizant that with the Qingyang and Chengdu Dongzhan malls stepping up pre-operational and marketing activities, expenses are likely to remain high. To provide investors with a stable yield outlook, following the anticipated cessation of earn out support by the end of this year, the trust can monetise some of its assets to realise NAV, given its low acquisition cost. PCRT has a remaining RMB242.1m of earn out support for this year.
Maintain BUY. We believe the NAV growth plus yield play offered by PCRT is still valid, particularly when operations of its initial portfolio are starting to stabilise. In addition to a 6.1% FY14 yield, we reckon that the ability to monetise part of its assets should lift its share price closer to its RNAV of $0.84. Maintain BUY.
Publish date: 10/02/14